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Liquidity Constraints, Household Wealth and Entrepreneurship


Annamaria Lusardi


The George Washington University School of Business; National Bureau of Economic Research (NBER)

Erik Hurst


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

May 2003

Dartmouth College Working Paper No. 2003

Abstract:     
Using data from the Panel Study of Income Dynamics (PSID), we show that the propensity to become a business owner in the United States is a non-linear function of wealth. The relationship between wealth and entry into entrepreneurship is essentially flat over the majority of the wealth distribution. It is only at the top of the wealth distribution - after the 95th percentile - that a positive relationship can be found. Segmenting businesses into industries with high and low starting capital requirements, we find no evidence that wealth matters more for businesses requiring higher initial capital. We exploit the regional variation in house prices as an instrument for liquidity. Households who lived in regions where housing prices appreciated strongly were no more likely to start a business than households in other regions. We conclude that, while liquidity constraints may be important for some households, they are not a deterrent to the majority of small business formation in the United States.

Number of Pages in PDF File: 37

Keywords: Business formation, wealthy households, starting capital

JEL Classification: E21, D91

working papers series


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Date posted: July 17, 2003  

Suggested Citation

Lusardi, Annamaria and Hurst, Erik, Liquidity Constraints, Household Wealth and Entrepreneurship (May 2003). Dartmouth College Working Paper No. 2003. Available at SSRN: http://ssrn.com/abstract=414780 or http://dx.doi.org/10.2139/ssrn.414780

Contact Information

Annamaria Lusardi (Contact Author)
The George Washington University School of Business ( email )
School of Business and Public Management
Washington, DC 20052
United States
HOME PAGE: http://business.gwu.edu/faculty/annamaria_lusardi.cfm
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Erik Hurst
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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